2011 September 06 Tuesday
Greek 1 Year Sovereign Bond Yield: 88.48%

The European financial crisis continues to build. A shockingly high number. I can understand a high yield given that the Greeks are going to default. But will principal loss be so high as to justify 88.48% yield? That's a huge number. If I was in Greece I'd get some of my money transferred into northern European banks and perhaps some in a Canadian or Australian bank. Get your money into resource-rich industrialized countries.

Mish also points to Silvio Berlusconi's attempt to cut spending and raise taxes to try to get Italian government interest rates below 6%. Once a country with high debt gets interest rates up in the 5-6% range it is hard to prevent default. The cost of servicing debt becomes too large a fraction of total GDP.

The Germans appear to have decided to let Greece default. Will Greece stay in the Euro zone once that happens? Can the Germans prevent Italy and Spain from defaulting? What's the end game? Sovereign debt default means bank failures. Why we should care: the domino effect. Can a firewall prevent dominoes from falling into northern Europe and then into the United States?

Economic growth is not going to save the southern European countries from default. High oil prices preclude that possibility. Can Italy and Spain cut spending severely enough to avoid default? Taxing their way back to solvency seems hard to do as higher taxes will cut growth even further.

I find the scale of the European debt crisis an amazing thing to behold given the depth of the underlying problems and the potential for spread into other financial markets. In this crisis I look for clues on whether stagnant and eventually declining world oil production will cause slow economic contraction or episodes that parallel the great contraction of 1929-1933. Is slow decline possible? Or will financial market panics cause sharp contractions? The level of debt globally makes the slow decline scenario less likely. Cascading defaults and sudden sharp cutbacks seem more likely.

Share |      By Randall Parker at 2011 September 06 10:31 PM  Economics Sovereign Crises

Anonymouse said at September 7, 2011 10:06 AM:

Man, are you behind the times. It is now 97%. Pretty soon it will be 120%!

REN said at September 7, 2011 12:33 PM:

There are three big currency loops: One is government spending, or digital dollars that are created out of nothing, and return as taxes or bonds. The other is credit money created at banks via loans. Credit money diappears as you pay off your loan, and the balance sheet drives toward zero.

A third currency loop is money that comes in from overseas and goes into your economy. For example dollars go overseas to China, and then vector back to the U.S., usually to be stored as TBills. When the foreign currency enters your economy it buys things based on a floating exchange rate. Countries can go into debt with foreigners because of this mechanism.

For example, The U.S. put the allies into Debt during and after WW1, and this ultimately led to WW2.

In Greeces case, their source of Euros is credit money borrowed from commercial banks, usually due to a bond issue. For the use of money they have to incur debt. If they spend more than they tax, they incur even more debt.

If humans want to have a well functioning economy, all of these loops need to be sanitized. Like a Human's circulation system, the money types should not co-mingle.

Greece and all the rest of the Europeans could go to their own sovereign currency, that way they could have fast feedback for their economy. Euro peons could trade with each other using trading banks. The trading banks would use bancors. In this way the currency of each country is santitized and cannot mix or be manipulated by foreign mercantilists (like Germany or China). Bancor supplies will be controlled with common law, not some supra national elites.

A 100 percent reserve currency in each country would eliminate much of the usurious nature of credit money. In other words, credit money demands interest servicing. Since most money in ciculation is used as tokens to trade our output, it makes no sense that credit should be the dominant fraction of the money supply. The cost of this credit is buried in every transaction. This is why we are getting poorer, as our world output continues to increase. Our output is siponed away as tolls to pay for our money. During depressions real assets get transferred, thus stripping the productive of their gains.

These secrets are hidden from view of most people, and they certainly are not taught in schools. Credit money and double entry bookeeping based on hypothecation is an invention of the gold men. They learned to put people into debt as a byproduct of storing gold and issuing paper against said gold.

We are off the gold standard now, but double entry ledgers remain, where people are hypothecated, or whole countries are put on the hook to service debt. The exponential function at the bottom of debt money means it cannot go on forever. The earth's carrying capacity can be exceeded to service debt money itself.

The fix is as astonishingly simple; jettison a system that is based on a lie; a lie that vectors usury to the worst elements of society just so humanity can have a token to trade their output.

Sovereign currency based in 100% reserves, with good law is the first step. The second step would be to implement trading banks, and those also are to be surrounded by good law. In this way, the money system comes under legal control, and the debt nature which steals so much, is reduced dramatically. Money becomes a legal unit that is a public good.

We would find ourselves with money that becomes a store of value and a token of exchange. We would find ourselves with an economy that self rights itself as the feedback is fast and effective.

It is positively astounding that Euro peons find themesleves in debt peonage to commercial bankers and other debt holders, and other criminals who feather their bed through rent seeking activities. The root failure of the Lisbon treaty, where no government money can be created, to offset the usury lost in the credit loop, is a failure to understand money.

This confusion attack, and the lack of understanding even among high level thinkers, has allowed the Euro peons to be completely snookered by the credit masters.

Wolf-Dog said at September 7, 2011 4:11 PM:

REN said: "The U.S. put the allies into Debt during and after WW1, and this ultimately led to WW2. "


I don't fully understand this mechanism. Can you give us more details about what happened during and after WW I?

I was under the impression that after WW I, England and France took a lot of gold-adjusted money from Germany as war reparations imposed by the Versailles Treaty, and then they sent that money to the US as investment, significantly fueling the stock market bubble in the US during the "Roaring 1920s". But then, the US banks were lending back to Germany some of the money that the British and French had taken from Germany as punishment for WW I and had sent to the US. Germany was certainly in debt by that mechanism, but how were England and France indebted to the United States, since they were victorious after WW I? Maybe you mean that only *during* WW I, England and France borrowed money from the US to fight the war against Germany? Is that what you meant?

Wolf-Dog said at September 7, 2011 4:22 PM:

Actually, under normal conditions, when the rate of debt growth is proportional to the growth of the GDP, there is no problem, and for a long time the total debt to the GDP ratio has been the same. But during the last 30 years the following things went wrong and forced the US and Europe to build more debt at a much faster rate than the rate of growth of their GDPs. Due to the competition from emerging Asian economies, the raw materials became more expensive and to purchase these raw materials we started to live beyond our means (more debt), and secondly (perhaps more importantly), the loss of jobs to Asia and the substitution of high paying jobs for low paying jobs due to loss of jobs to Asia, once again caused the US and EU to live beyond their means by borrowing more and more. Otherwise,30 years ago or even 20 years ago, the government deficit was annually proportional to the rate of growth of the GDP, and this was working very well, except that this time foreign trade deficit became so much bigger as a percentage of the GDP that the annual government deficit is forced to grow to much higher percentages than the growth rate of the GDP, leading to a disaster.

Stephen said at September 7, 2011 10:06 PM:

The lenders need to be taught a lesson, so I vote for a default. The lesson being taught will be two fold: first, only lend what you can afford to lose; second, the prophecies of the banksters are self-fullfilling.

no said at September 8, 2011 12:55 PM:

I hope for that also Stephen, but the problem is the whole of the Western world pension funds would go down with the banks, no?

Things seem to have been setup in such a way as you can't let the banks fail otherwise some of the most vulnerable end up hurt the most, while the people most culpable get to keep all their fraudulently obtained bonuses.

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